In the Lead – Sell Everything

Chinese May import-export volumes exhibited patterns that were regarded as indicative of weakness and of slowing domestic demand. As well, there seemed to be a softening of demand for Chinese-made goods in overseas markets on the back of the apparent rough patch that the global economy is hitting mid-cycle at this time.

Aside from the Chinese news, there was not much to report in the markets other than on-going wrangling regarding the restructuring of Greek debt (Germany insists that the private sector play a role in same) and the fact that South Korea unexpectedly raised interest rates overnight.

The more pressing problem for China is not as much the shrinking trade gap, but, rather, it will once again be contained within the release of consumer inflation data due on Tuesday. Analysts expect CPI to come in at its highest reading in three years, and for it to run at or above the 5.4% level. China’s leadership might thus be prompted to take additional actions intended to slow the robust spiral in prices.

Tired gold bulls went to work this morning but were unable to lift the yellow metal as the US dollar made further progress to the upside in the wake of on-going perceptions that a Greek default remains all but inevitable. As well, the market appears to still be suffering from the after-effects of the apparent unwillingness of the Fed to keep the commodities’ party running "after-hours" via the generous extension of another QE gift.

Spot gold dealings opened Friday’s session with a $3.70 per ounce loss and a quote on the bid-side at $1,540.60 in New York. The greenback was trading at 74.31 on the trade-weighted index at the same time. The losses soon deepened and the yellow metal retreated to near $1,525.00 per ounce, losing more than $18 in the process, as pre-weekend book-squaring and a whopping $2.68 pullback in black gold despite OPEC projections of a supply gap for later this year, added to selling pressure.

Silver initially fell 20 cents to open at the $37.37 mark per ounce. The selling that emerged in the gold pits spilled over to silver and the latter dropped 117 cents to $36.31 in the first two hours of trading action. Both the yellow and the white metal appear to be digging into a confined "summer doldrums" trading channel and might need sizeable external developments to generate a breaking of such a pattern.

The recently dissipating momentum (amid rising prices) in gold has brought the $1,555 mark into focus as a new resistance level. Other analysts go beyond the perception of a bearish divergence at this juncture and they perceive a possible bearish or "truncated" gold top shaping up, should gold not be able to penetrate above the $1,551 level with success.

Platinum and palladium also declined in the initial minutes of trading in New York. The former lost $20 to ease to the $1,817.00 level while the latter fell $10 to be quoted at $804.00 on the bid-side per troy ounce. Support in platinum at this time is thought to be found near the $1,820 mark and at the $800-805 level for palladium.

Johnson Matthey’s Platinum Today reports that South African PGM production experienced a surge in recent months. A 23.4% gain in the output of platinum-group metals was seen as leading that country’s overall mine production of metals, which recorded a 5.6% increase in the period ending in April. Analysts at Standard Bank (SA) remain of the opinion that their price targets for platinum ($1,900) and palladium ($950) can be achieved prior to the end of this year based on projected supply-demand fundamentals.

Speaking of impact factors, the one that appears to be shaping up to matter most over the coming months, is the emergent pattern of the flow of funds in Treasurys. As we near the end of QE2, the fact that the program has been fairly effective in diverting monies out of Treasury holdings and into commodities and equities has to be pondered with some caution to be sure. This, as the flow of funds into Treasurys has eroded quite noticeably since the initiation of QE2 in November.

One school of thought believes that the end of QE2 will spell a mad scramble for reallocating funds by individual and institutional investors. That same school feels that the first noticeable "post QE2 trade" will be focused on selling commodities and Treasurys and buying solid bonds and quality equities. Not that such was the case in the equities markets, at least as of this morning however. The Dow was headed for its longest (in trading week terms) decline since 2002, posting a 112-point drop that brought it down to very near the 12,000 mark.

Some of the Dow’s losses were attributed to the Fed digging in on its "No Mas Dinero" stance exhibited by Mr. Bernanke earlier this week. Others saw a rising level of disappointment with the US economic recovery’s strength. The downbeat mood was pervasive as all 30 components of the Dow lost ground in the sell-off this morning.

A day of "risk-off," this is shaping up to be. Flocking to the shelter of the US dollar appeared logical (it gained 0.52 on the index mid-morning), but less logical was the decline in gold –which is supposed to normally offer safe harbour from a declining stock market. Oh well, the "buy everything" syndrome so heavily on display since the advent of QE1 and QE2 shows that it can also morph into "sell everything" on occasion.

Some of the apprehensions related to the US economy’s current trials and tribulations were reflected in one Fed dove’s speech this morning. Marketwatch reported that William Dudley, the President of the New York Fed, said on Friday that:

"recent disappointing data suggest that downside risks to the outlook have increased. The renewed drop in home prices could dampen consumer spending, prompting businesses to limit hiring. Aggressive government spending cuts could also slow growth in the short and medium term. I still believe that [these issues] remain risks rather than the most likely outcomes."

Mr. Dudley also told his audience in Brooklyn NY that his forecast is for a "moderate recovery to continue [in the second half of 2011] but at a pace that is painfully slow for unemployed workers.

He concluded by saying that he expects "headline inflation to moderate, provided that commodity prices stop rising rapidly."

That proviso remains the $64K (with many zeroes added to it) question of this summer. When, and how (we already know why) might certain commodity prices stop rising rapidly, or perhaps at all?

We are now headed down to The Alamo; or, nearby, in any event, to…remember the busy goings-on at the 35th Annual International Precious Metals Institute Conference. Some 500 delegates from 22 countries will be making the trek to San Antonio to hear presentations on a wide range of topics of interest. Economic analysis, metals technology and processing, conflict gold, impending regulation in precious metals, market overviews, and a whole spectrum of other important issues will be discussed. Kitco News will cover the event and we hope to bring you fascinating video clips with delegates in attendance.